When a pay raise costs too much

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Minnesota’s anti-poverty programs are intended to incentivize work for those who are able, meaning that earning more money is usually a more lucrative deal than earning less money and remaining on public assistance. However, sometimes the numbers get a little wonky, creating “cliffs” where people lose a lot of assistance for earning just a little bit more money.

One of these cliffs has emerged in Minnesota’s new health care market. In general, MNsure and its Affordable Care Act underpinnings have made health insurance tremendously more affordable to a lot of people. The cost of coverage, either public or private, generally rises slowly as an enrollee’s income rises. But there’s a point at which costs jump very steeply: for adults whose incomes rise just above 200% of the federal poverty level (FPL). At this point, people may literally not be able to afford a pay raise.

Adults whose incomes are between 133-200% FPL are eligible for MinnesotaCare, a state-run insurance program. The program is similar to the free Medical Assistance (Medicaid) program offered for lower-income adults, except that MinnesotaCare has a sliding-fee premium. Monthly premiums top out at $50 a month, and co-pays are a maximum of $3.

So where’s the problem? The problem is that once folks earn just a little too much money to be eligible for MinnesotaCare, they have to purchase private insurance instead. Even though Minnesota’s exchange premiums are the lowest in the nation, and even though tax credits help defray the cost of private insurance, the cost increase is incredibly steep.

Let me illustrate this with a hypothetical enrollee: Debra. Debra is 35 years old and lives in Minneapolis. She works full-time at $10.60 an hour, which comes to around $22,000 a year. As a one-person household, she can participate in MinnesotaCare until her annual income exceeds $22,980. Debra’s annual MinnesotaCare premiums cost her about $528.

Then Debra gets a small raise at work: 50 cents more per hour. Debra’s income rises to $23,000 and she needs to purchase a private insurance plan instead. Even after tax credits, the average premium will total $1,587 per year. That increase eats up her entire pay raise… but there’s more. Her out-of-pocket expenses could be thousands of dollars each year. The plan with that “average premium” has an out-of-pocket limit of over $3,000. Accepting that pay raise could actually be a massive financial step backwards for Debra.

As a MNsure Navigator, I’ve met a lot of people hovering on this same 200% FPL precipice. I tell them, “I would never encourage you to earn less money, but you need to be aware of what a big cost difference you will see when you cross this line.” (This same big cost increase also exists for children at 275% FPL, when they transition from MA directly to private insurance.)

This cliff isn’t Minnesota’s making. In fact, Minnesota has been a leader for offering MinnesotaCare and expanded MA coverage to its low-income residents. In some states, low-income people can fall into a “coverage gap” where their incomes are too high for their state’s Medicaid program and too low to qualify for federal subsidies to purchase private insurance. In many states, people are pushed onto the private insurance marketplace at only 100% FPL.

Minnesota has been a leader in bringing affordable insurance coverage to people at all income levels, and that’s an amazing accomplishment. There’s nothing to be gained by smoothing out the 200% FPL cliff, since it would require raising MinnesotaCare premiums. But we need to be aware that this cliff exists, that it is very significant, and that it forces some people to make hard choices about how much more money they can really afford to earn.